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Transcript of Lect 1 2 Cbl Compatibility Mode
7/28/2019 Lect 1 2 Cbl Compatibility Mode
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Monetary Policy and the Role of Central Banks
MSc/Diploma in Economics, Banking and Finance (Core Module)
MSc/Diploma in International Banking and Finance (Core Module)
Course Coordinator: Professor Campbell Leith
Lecturers: Prof C. Leith and Prof T. Kirsanova
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Monetary Policy and the Role of Central Banks
• Contact by email. [email protected]@glasgow.ac.uk
• Lectures Mon 9-11, repeated Tues 10-12. One lecture a week.
2
This lecture lasts for two hours, for ten weeks.
• There are no tutorials in this class.
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Monetary Policy and the Role of Central Banks
• Assessment
(1) Exam in May/June 2011. (75% of total marks )
Students should answer 2 out of 4 questions.
2 hour exam.
3
.
Essay Topic in Handbook.
• Text Book
No recommended text book.
Extensive reading list provided in Course Module.
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Some Definitions
• Monetary Policy
– A central bank's actions which affect the quantityand/or cost of money and credit.
4
• Central Banks
– typically the institutions that control monetary policy in
a country
• e.g. Federal Reserve in the US and the EuropeanCentral Bank in the Euro Area
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Increasing Number of Central Banks
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Source: King, M. (1999), “Challenges for Monetary Policy: New and Old”, paper
presented at symposium, Jackson Hole Wyoming.
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Monetary Policy and the Role of Central Banks:
Course Objectives
• What aims does Monetary Policy have and why?
• What means are at a Central Banks’ disposal to achieve
these aims?
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• How Monetary Policy affects the economy?
• What was wrong with post WWII monetary policy andwhat are the solutions?
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Global Inflation
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Source: King, M. (1999), “Challenges for Monetary Policy: New and Old”,paper presented at symposium, Jackson Hole Wyoming.
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Inflation – The Great Moderation
Inflation - The Great Moderation
20
25
30
8
-5
0
5
10
15
1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009
Year
% a g e United Kingdom
United States
Source: OECD
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Inflation More Recently
Inflation
6
7
8
9
10
United Kingdom
9Source: OECD
-1
0
1
2
3
4
5
1993 1995 1997 1999 2001 2003 2005 2007 2009
Year
% a
g e United States
G7
OECD - Europe
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Inflation More Recently
Inflation - BRICs
15
20
25
10Source: OECD
-5
0
5
10
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Year
% a g e
ChinaIndia
Russian Federation
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The Goals of Monetary Policy
• Controlling Inflation……
• Unemployment and output (i.e. real variables)
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– real factors and long-run.
– nominal variables
• Monetary policy and fiscal policy.
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Instruments of Monetary Policy
(A) Direct Controls
- setting quantity and price of money or credit
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(B) Indirect Controls- using the market mechanism
- What happened in the credit crunch and how does
that affect monetary policy?
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The Monetary Policy Transmission Mechanism
• Examine the connection between instruments and goals
– How changes in policy affect the economy.
– The monetary transmission mechanism.
• Official interest rates affect spectrum of bank rates.
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• Credit Channel, quantity versus price of money.
• Policy lags
• Different experience across countries.
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How Central Banks Behave in Practice
• Look at the data for how central banks behave
• Taylor identified a simple equation that could summarize much ofthe complexity in monetary policy
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• The role of inflation and other variables in determining monetarypolicy
• In particular role for
– expected inflation – smaller role for spare capacity in the economy
– role for interest rate smoothing
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Other Issues in Monetary Policy Design
• An Inflation bias can arise when monetary policy is in the hands ofpoliticians
– Govt declares low inflation goal but springs a monetary surpriseto boost real economy
– If public expects this, this can fuel inflation
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• Suggestion is that we should take monetary policy out of the handsof politicians
– Have credible monetary policy from independent central banksor inflation targets
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Lectures 2-5: The Goals of Monetary Policy
• Stated Objectives of Central Banks
• The Trade-Off Between Output and Inflation
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• The Fiscal Role of Central Banks
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The Goals of Central Banks
• Why Inflation is important? Experience
• Inflation varies greatly across countries and across time.
– GE, JP, UK, IT, US
• Extreme examples
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– Deflation – Hyperinflation
• Data suggests that inflation has been higher than is socially optimal
• Q: “Do you agree that preventing high inflation is an importantnational priority, as important as preventing drug abuse orpreventing deterioration in quality of our schools?”
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Attitudes towards Inflation
• How Important is Preventing Inflation?
1 2 3 4 5
Fully
Agree
Undecided FullyDisagree
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• Miles and Scott (2005) Macroeconomics: Understanding the Wealth ofNations.
Citizens 52 32 4 8 4
Economists 18 28 11 26 18
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Theoretical Costs of Inflation
• Costs of Unanticipated Inflation
(a) Microeconomic Costs
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(b) Distribution Costs
(c) Resource Costs
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Inflation and Inflation Volatility
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Theoretical Costs of Inflation
• Costs of Anticipated Inflation
(a) Shoe Leather
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(b) Menu Costs
(c) Distortions in the Tax system
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Stated Objectives of Central Banks
• Typical Objectives
• Ensuring a low and stable rate of inflation.
• Supporting full employment/economic development.
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• Ensuring financial stability.
• Generating fiscal revenues (largely developing countries).
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The United States Fed’s Legislative Mandate
Fed Reserve Act 1913 - “provide an elastic currency ” i.e. act as a
‘lender of last resort’. No mention of other macroeconomic goals.
1977 Amendment to the Act - “shall maintain long-run growth of
the monetary and credit aggregates commensurate with the
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economy’s long-run potential to increase production, so as to promote effectively the goals of maximum employment, stable
prices and moderate long-term interest rates ”.
Low and Stable Rate of Inflation
Maximum Employment
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The European Central Bank’s Legislative Mandate
ECB’s Charter “The primary objective of the European System of
Central Banks is to maintain price stability. Without prejudice to
the objective of price stability, the ESCB shall support the general
economic policies in the Community ”. The Community’s policies
include “a high level of employment ” and “a balanced development
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of economic activities ”.
Low and stable rate of inflation.
Less emphasis on full/maximum employment.
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The Bank of England’s Legislative Mandate
Bank of England Act 1998,
“the objectives of the Bank of England shall be-
(a) to maintain price stability, and
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(b) subject to that, to support the economic policy of Her Majesty's Government, including its objectives for growth and employment .”
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The Bank of Japan’s Legislative Mandate
Bank of Japan Act Article 1
“The objective of the Bank of Japan, as the central bank of
Japan, is to issue banknotes and to carry out currency and
monetary control. In addition... the Bank's objective is to
ensure smooth settlement of funds among banks and other
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financial institutions, thereby contributing to the maintenance of an orderly financial system .”
Bank of Japan Act Article 2
“Currency and monetary control shall be aimed at, through the
pursuit of price stability, contributing to the sound
development of the national economy .”
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Output-Inflation Trade Off
• The Phillips Curve
– This identifies a relationship between output and inflation.
• However it was believed that the relationship had broken down inthe 1970s.
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• Friedman developed theory which suggested that there was no long-run relationship between output and inflation.